Most goods and services have been categorised to determine whether they are subject to VAT when sold and what the rate of VAT would be.
Taxable supplies are subject to VAT at the following rates:
Standard rate 20% – applies to most goods and services such as adult clothing, electrical items
Reduced rate 5% – domestic fuel, children’s car seats
Zero rate 0% – children’s clothing, books, food
Exempt supplies are by law not subject to VAT. This includes for example insurance services.
Other goods and services are outside the scope of VAT for example MOT test fees, charitable donations, wages and salaries.
Businesses have to register for VAT if they make taxable supplies (standard, reduced or zero rate) that exceed £85,000.
A VAT registered business must charge VAT on all its taxable supplies to business customers and to the general public. This is known as output VAT. It can also claim back VAT it has paid on purchases of goods and services. This is known as input VAT. The difference between output VAT and input VAT is then paid to HM Revenue and Customs. If the input VAT is more than the output VAT, this can be reclaimed from HMRC.
VAT registered businesses have to complete and submit a VAT return to HMRC. This tells HMRC how much output VAT has been charged to cusotmers and how much input VAT has been paid on purchases. The return also shows total sales and purchases in the period.